THE BASIS POINT

FDIC To Run ‘Bad Bank’ Program, Soros Says It Won’t Solve Problem

The FDIC is increasingly looking like the candidate to run the ‘bad bank’ that would help to unwind bad assets still on bank’s books. This was the original intent of the TARP:

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.

Speaking at the World Economic Forum in Davos, George Soros said that this proposal wouldn’t solve all the banking problems.

“That (the “bad bank” proposal) will help relieve the situation, but it will not be sufficient to turn it around,” Soros said during a live interview at the Davos economic conference in Switzerland. Instead, Soros said he would create a “good bank” and re-capitalize the good assets.

He admitted his alternative plan is not likely to get support because it too closely approaches nationalization. “The political will to do that is not there,” he said.

As to Paulson’s handling of the first half of the $700 billion Wall Street bailout fund known as TARP, Soros said the money was used “capriciously and haphazardly.” He said half of it has now been wasted, and the rest will need to be used to plug holes.

Although Soros saw trouble ahead, he stresses he did not foresee how bad it was going to get after the “life-changing event” of the Lehman Brothers bankruptcy.

“The storm that started in the financial system has now spread, in a very big way, to the real economy,” he said. “It has fallen off the cliff following the Lehman thing.”